Tax Cuts Beat Rebates Every Time

February 7, 2001

Since cutting rates only for the rich is considered unfair, while cutting tax rates for the middle class costs too much revenue, we have ended up with complicated, halfway measures to lower the tax burden through tax credits, exemptions, exclusions and deductions.

No one actually pays the tax rates their income nominally requires; but they make a huge investment of time and rearrange their affairs to reduce their tax burden. This causes massive inefficiency, waste and malinvestment. Tax burdens vary wildly among those with roughly the same income.

A simple solution is across-the-board tax cuts, as George W. Bush has proposed. But columnist David Broder says two former Republican congressional staffers, Steve Hofman and Ed Kutler, are pushing a tax rebate proposal instead. They would have the government send out checks to people based on the size of the surplus.

Not surprisingly, the day after the Broder column appeared, two liberal economists made a similar proposal in the New York Times.

The economic case against rebates is well documented, much of it based on the 1975 rebate initiated by Gerald Ford.

Rebates have no impact on incentives -- they are just found money people spend, without encouraging any additional work, saving or investment.

Rebates don't even add to spending because of something called the permanent income hypothesis, according to which people tend to save most such windfalls.

Politically, because they aren't linked to taxable economic activity, rebates will be treated as a new entitlement program.

Many European countries have programs like this called family allowances, which serve no useful economic purpose, but are so deeply ingrained their abolition is unthinkable.

Thus European tax rates are rapidly approaching 100 percent, with huge tax rebates in return. Needless to say, incentives and growth suffer under such a system.